What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-12-17 compared with 2021-06-11 · 98 added, 130 removed, 164 unchanged (58% of the section changed)

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construction delays;

the compromising of confidentiality, availability or integrity of information, including cyber-attacks;

the compromising of confidentiality, availability or integrity of information, including due to cyber-attacks;

historic growth rate sustainability;

downgrade of our credit ratings;

damages to our reputation;

damage to our reputation;

challenges in international markets;

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origin and raw material costs of suppliers;

inventory availability;

disruption in our supply chain;

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We are the leading retailer, and a leading distributor, of automotive replacement parts and accessories in the Americas.

We began operations in 1979 and at May 8, 2021 operated 5,975 stores in the U.S., 635 stores in Mexico and 47 stores in Brazil.

We began operations in 1979 and at November 20, 2021, operated 6,066 stores in the U.S., 666 stores in Mexico and 53 stores in Brazil.

Each store carries an extensive product line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories and non-automotive products.

At May 8, 2021 in 5,107 of our domestic stores, we also had a commercial sales program that provides commercial credit and prompt delivery of parts and other products to local, regional and national repair garages, dealers, service stations and public sector accounts.

At November 20, 2021, in 5,211 of our domestic stores, we also had a commercial sales program that provides commercial credit and prompt delivery of parts and other products to local, regional and national repair garages, dealers, service stations and public sector accounts.

We also have commercial programs in all stores in Mexico and Brazil.

We sell the ALLDATA brand automotive diagnostic and repair software through www.alldata.com.

We sell the ALLDATA brand automotive diagnostic, repair and shop management software through www.alldata.com.

Additionally, we sell automotive hard parts, maintenance items, accessories and non-automotive products through www.autozone.com, and our commercial customers can make purchases through www.autozonepro.com.

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We do not derive revenue from automotive repair or installation services.

Operating results for the twelve and thirty-six weeks ended May 8, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending August 28, 2021.

Operating results for the twelve weeks ended November 20, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending August 27, 2022.

Each of the first three quarters of our fiscal year consists of 12 weeks, and the fourth quarter consists of 16 or 17 weeks.

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COVID-19 Impact

The COVID-19 pandemic continues to impact numerous aspects of our business.

Our sales remain at an elevated level compared to sales prior to the pandemic, as we believe the additional pandemic-related government stimulus benefitted many of our customers.

Our main priority continues to be the health, safety and well-being of our customers and employees.

For fiscal 2021, we have incurred approximately $46 million in pandemic related expenses, including Emergency Time Off (“ETO”) benefit enhancements as compared to approximately $75 million in the comparable prior year period.

The long-term impact to our business remains unknown as we are unable to accurately predict the impact COVID-19 will have due to numerous uncertainties, including the duration of the outbreak, the impact of variants of the disease, the distribution and efficacy of vaccines, the speed at which such vaccines are administered, actions that may be taken by governmental authorities intended to minimize the spread of the pandemic or to stimulate the economy and other unintended consequences.

Accordingly, business disruption related to the COVID-19 outbreak may continue to cause significant fluctuations in our business, unusually impacting demand for our products, our store hours and our workforce availability and magnify risks associated with our business and operations.

See “Risk Factors—The ongoing outbreak of COVID-19 has been declared a pandemic by the World Health Organization, continues to spread within the United States and many other parts of the world and may have a material adverse effect on our business operations, financial condition, liquidity and cash flow” in our Annual Report on Form 10-K for additional information.

The COVID-19 pandemic continues to impact the global economy and numerous aspects of our business including our customers, employees and suppliers.

Our highest priority remains the safety and well-being of our customers and employees.

Since the beginning of the COVID-19 pandemic, we have experienced strong same store sales growth and our sales have remained at all-time high volumes.

The long-term impact to our business remains unknown, may magnify risks associated with our business and operations and may continue to cause fluctuations in demand for our products, our store hours and our workforce availability.

Other unknowns include the potential impact of any related vaccine mandates on our workforce.

Please refer to the “Risk Factors” section of our Annual report on Form 10-K for the year ended August 28, 2021 for additional information.

Executive Summary

Net sales increased 31.4% for the quarter ended May 8, 2021 compared to the prior year period, which was driven by an increase in domestic same store sales (sales from stores open at least one year) of 28.9%.

Net sales increased 16.3% for the quarter ended November 20, 2021 compared to the prior year period, which was driven by an increase in domestic same store sales (sales from stores open at least one year) of 13.6%.

Domestic commercial sales increased 29.4%, which represents approximately 25% of our total sales.

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Diluted earnings per share increased 38.1% to $25.69 per share from $18.61 per share.

The increase in net income for the quarter ended May 8, 2021 was driven by strong topline growth.

Our business is impacted by various factors within the economy that affect both our consumer and our industry, including but not limited to fuel costs, wage rates and other economic conditions, including the effects of, and responses to, COVID-19.

The increase in net income for the quarter ended November 20, 2021 was driven by strong topline growth and operating expense leverage.

Our business is impacted by various factors within the economy that affect both our consumer and our industry, including but not limited to fuel costs, wage rates, supply chain disruptions, hiring and other economic conditions, including the effects of, and responses to, COVID-19.

Given the nature of these macroeconomic factors, we cannot predict whether or for how long certain trends will continue, nor can we predict to what degree these trends will impact us in the future.

During the third quarter of fiscal 2021, failure and maintenance related categories represented the largest portion of our sales mix, at approximately 82% of total sales, which is consistent with the comparable prior year period, with failure related categories continuing to be the largest portion of our sales mix.

While we have not experienced any fundamental shifts in our category sales mix as compared to the previous year, in our domestic stores we continue to experience a slight increase in mix of sales of the discretionary category as compared to previous quarters.

We believe the improvement in this sales category continues to benefit from the pandemic as many of our customers spent more time and money to work on projects.

The two statistics we believe have the most positive correlation to our market growth over the long-term are miles driven and the number of seven year old or older vehicles on the road.

During the first quarter of fiscal 2022, failure and maintenance related categories represented the largest portion of our sales mix, at approximately 84% of total sales, which is consistent with the comparable prior year period, with failure related categories continuing to be the largest portion of our sales mix.

We did not experience any fundamental shifts in our category sales mix as compared to the previous year.

Our sales mix can be impacted by severe or unusual weather over a short-term period.

Over the long-term, we believe the impact of the weather on our sales mix is not significant.

The two statistics we believe have the closest correlation to our market growth over the long-term are miles driven and the number of seven year old or older vehicles on the road.

While over the long-term we have seen a close correlation between our net sales and the number of miles driven, we have also seen time frames of minimal correlation in sales performance and miles driven.

During the periods of minimal correlation between net sales and miles driven, we

believe net sales have been positively impacted by other factors, including macroeconomic factors and the number of seven year old or older vehicles on the road.

During the periods of minimal correlation between net sales and miles driven, we believe net sales have been positively impacted by other factors, including macroeconomic factors and the number of seven year old or older vehicles on the road.

The average age of the U.S.

light vehicle fleet continues to trend in our industry’s favor.

According to the latest data provided by the Auto Care Association in the 2021 Auto Care Factbook, for the ninth consecutive year, the average age of vehicles on the road has exceeded 11 years.

Since the beginning of the fiscal year and through March 2021 (latest publicly available information), miles driven in the U.S.

decreased 7.2% compared to the same period in the prior year;

however, the March 2021 data showed significant improvement in the number of miles driven.

light vehicle fleet continues to trend in our industry’s favor as the average age has exceeded 11 years since 2012, according to the latest data provided by the Auto Care Association.

As of January 1, 2021, the average age of light vehicles on the road was 12.1 years.

For September 2021 (latest publicly available information), miles driven in the U.S.

increased 7.9% compared to the same period in the prior year.

We believe the increase in miles driven is due to the nation beginning to return to pre-pandemic levels, but we are unable to predict if the increase will continue or the extent of the impact it will have on our business.

Twelve Weeks Ended May 8, 2021

Compared with Twelve Weeks Ended May 9, 2020

Net sales for the twelve weeks ended May 8, 2021 increased $871.7 million to $3.651 billion, or 31.4% over net sales of $2.779 billion for the comparable prior year period.

Twelve Weeks Ended November 20, 2021

Compared with Twelve Weeks Ended November 21, 2020

Net sales for the twelve weeks ended November 20, 2021 increased $514.6 million to $3.7 billion, or 16.3% over net sales of $3.2 billion for the comparable prior year period.

Total auto parts sales increased by 16.2%, primarily driven by an increase in domestic same store sales of 13.6% and net sales of $68.7 million from new stores.

Domestic commercial sales increased $204.6 million to $899.9 million, or 29.4%, over the comparable prior year period.

Gross profit for the twelve weeks ended May 8, 2021 was $1.915 billion, compared with $1.491 billion during the comparable prior year period.

Gross profit for the twelve weeks ended November 20, 2021 was $1.9 billion, compared with $1.7 billion during the comparable prior year period.

Gross profit, as a percentage of sales was 52.5% compared to 53.1% during the comparable prior year period.

The decrease in gross margin was primarily driven by the accelerated growth in our Commercial business and our investment in pricing initiatives.

Operating, selling, general and administrative expenses for the twelve weeks ended May 8, 2021 were $1.111 billion, or 30.4% of net sales, compared with $999.0 million, or 35.9% of net sales during the comparable prior year period.

The decrease in operating expenses, as a percentage of sales, was driven by strong sales growth and approximately $75 million in pandemic related expenses, including ETO for our AutoZoners, incurred in the prior year.

Net interest expense for the twelve weeks ended May 8, 2021 was $45.0 million compared with $47.5 million during the comparable prior year period.

The decrease was primarily due to a decrease in the weighted average borrowing rate.

Average borrowings for the twelve weeks ended May 8, 2021 were $5.351 billion, compared with $5.460 billion for the comparable prior year period.

Weighted average borrowing rates were 3.3% and 3.4% for the quarter ended May 8, 2021 and May 9, 2020, respectively.

Our effective income tax rate was 21.4% of pretax income for the twelve weeks ended May 8, 2021, and 22.8% for the comparable prior year period.

The decrease in the tax rate was primarily attributable to an increased benefit from stock options exercised during the twelve weeks ended May 8, 2021.

The benefit of stock options exercised for the twelve weeks ended May 8, 2021 was $16.0 million compared to $1.1 million in the comparable prior year period.

Net income for the twelve week period ended May 8, 2021 increased by $253.3 million to $596.2 million from $342.9 million in the comparable prior year period, and diluted earnings per share increased by 84.0% to $26.48 from $14.39.

The decrease in gross margin was primarily driven by initiatives to accelerate commercial business growth.

Operating, selling, general and administrative expenses for the twelve weeks ended November 20, 2021 were $1.2 billion, or 31.9% of net sales, compared with $1.1 billion, or 33.6% of net sales during the comparable prior year period.

The decrease in operating expenses, as a percentage of sales, was driven by strong sales growth.

Net interest expense for the twelve weeks ended November 20, 2021 was $43.3 million compared with $46.2 million during the comparable prior year period.

Average borrowings for the twelve weeks ended November 20, 2021 were $5.3 billion, compared with $5.5 billion for the comparable prior year period.

Weighted average borrowing rates were 3.30% and 3.27% for the quarter ended November 20, 2021 and November 21, 2020, respectively.

Our effective income tax rate was 21.9% of pretax income for the twelve weeks ended November 20, 2021, and 22.2% for the comparable prior year period.

The decrease in the tax rate was primarily attributable to an increased benefit from stock options exercised during the twelve weeks ended November 20, 2021.

The benefit of stock options exercised for the twelve weeks ended November 20, 2021 was $11.3 million compared to $7.6 million in the comparable prior year period.

Net income for the twelve week period ended November 20, 2021 increased by $112.8 million to $555.2 million from $442.4 million in the comparable prior year period, and diluted earnings per share increased by 38.1% to $25.69 from $18.61.

The impact on current quarter diluted earnings per share from stock repurchases since the end of the comparable prior year period was an increase of $2.33.

Thirty-Six Weeks Ended May 8, 2021

Compared with Thirty-Six Weeks Ended May 9, 2020

Net sales for the thirty-six weeks ended May 8, 2021 increased $1.630 million to $9.716 billion, or 20.2%, over net sales of $8.086 billion for the comparable prior year period.

Total auto parts sales increased by 20.4%, primarily driven by an increase in domestic same store sales of 19.0% and net sales of $133.4 million from new stores.

Domestic commercial sales increased by $410.6 million, or 23.4%, to $2.163 billion.

Gross profit for the thirty-six weeks ended May 8, 2021 was $5.150 billion, or 53.0% of net sales, compared with $4.358 billion, or 53.9% of net sales, during the comparable prior year period.

The decrease in gross margin was primarily driven by the accelerated growth in our Commercial business and our investment in pricing initiatives.

Operating, selling, general and administrative expenses for the thirty-six weeks ended May 8, 2021 were $3.249 billion, or 33.4% of net sales, compared with $2.958 billion, or 36.6% of net sales, during the comparable prior year period.

The decrease in operating expenses, as a percentage of sales, was primarily driven by strong sales growth.

Total pandemic related expenses, including ETO were approximately $46 million for the thirty-six week period ended May 8, 2021 compared to approximately $75 million during the comparable prior year period.

Net interest expense for the thirty-six weeks ended May 8, 2021 was $137.2 million compared with $135.5 million during the comparable prior year period.

The increase was primarily due to an increase in the weighted average borrowing rate.

Average borrowings for the thirty-six weeks ended May 8, 2021 were $5.460 billion, compared with $5.371 billion for the comparable prior year period.

Weighted average borrowing rates were 3.3% and 3.2% for the thirty-six week periods ended May 8, 2021 and May 9, 2020, respectively.

Our effective income tax rate was 21.5% of pretax income for the thirty-six weeks ended May 8, 2021, which was flat to the comparable prior year period.

The benefit of stock options exercised for the thirty-six week period ended May 8, 2021 was $35.2 million compared to $17.6 million in the comparable prior year period.

Net income for the thirty-six week period ended May 8, 2021 increased by $392.0 million to $1.385 billion due to the factors set forth above, and diluted earnings per share increased by 45.6% to $59.80 from $41.08 in the comparable prior year period.

The impact on current year to date diluted earnings per share from stock repurchases since the end of the comparable prior year period resulted in an increase of $2.18 per share.

Liquidity and Capital Resources

The primary source of our liquidity is our cash flows realized through the sale of automotive parts, products and accessories.

For the thirty-six weeks ended May 8, 2021, our net cash flows from operating activities provided $2.230 billion compared with $1.303 billion provided during the comparable prior year period.

The increase is primarily due to favorable changes in accounts payable and growth in net income due to accelerated sales growth as a result of the effect of the COVID-19 pandemic on our customers.

Our net cash flows used in investing activities for the thirty-six weeks ended May 8, 2021 were $358.7 million as compared with $247.9 million in the comparable prior year period.

Capital expenditures for the thirty-six weeks ended May 8, 2021 were $375.7 million compared to $273.9 million.

The increase is primarily driven by increased store openings.

During the thirty-six week period ended May 8, 2021 and May 9, 2020, we opened 108 and 73 net new stores, respectively.

Investing cash flows were impacted by our wholly owned captive, which purchased $52.6 million and sold $72.3 million in marketable debt securities during the thirty-six weeks ended May 8, 2021.

Our cash flow results benefitted from the quarters strong sales and continued progress on our initiatives.

We believe that our cash generated from operating activities, available cash reserves and available credit, supplemented with our long-term borrowings will provide ample liquidity to fund our operations while allowing us to make strategic investments to support long-term growth initiatives and return excess cash to shareholders in the form of share repurchases.

As of November 20, 2021, we held $961.1 million of cash and cash equivalents, as well as $2.2 billion in undrawn capacity on our revolving credit facility.

We believe our sources of liquidity will continue to be adequate to fund our operations and investments to grow our business, repay our debt as it becomes due and fund our share repurchases over the short-term and long-term.

In addition, we believe we have the ability to obtain alternative sources of financing, if necessary.

However, decreased demand for our products or changes in customer buying patterns would negatively impact our ability to generate cash from operating activities.

Decreased demand or changes in buying patterns could also impact our ability to meet our debt covenants of our credit agreements and, therefore, negatively impact the funds available under our revolving credit facility.

In the event our liquidity is insufficient, we may be required to limit our spending.

For the twelve weeks ended November 20, 2021, our net cash flows from operating activities provided $777.9 million compared with $683.5 million provided during the comparable prior year period.

The increase is primarily due to growth in net income due to accelerated sales growth and a result of favorable changes in accounts payable, driven by higher sustained inventory purchase volume in the current period as compared to the same period in the prior year.

These favorable changes were partially offset by a smaller increase in accrued benefits and withholdings in the current period, as compared to the same period in the prior year due to the ability to defer certain payroll tax payments in the prior year under the Coronavirus Aid, Relief, and Economic Security Act.

Our net cash flows used in investing activities for the twelve weeks ended November 20, 2021 were $91.0 million as compared with $110.2 million in the comparable prior year period.

Capital expenditures for the twelve weeks ended November 20, 2021 were $102.3 million compared to $113.0 million in the comparable prior year period.

The decrease is primarily driven by decreased store openings.

During the twelve week period ended November 20, 2021 and November 21, 2020, we opened 18 and 41 net new stores, respectively.

Investing cash flows were impacted by our wholly owned captive, which purchased $7.0 million and sold $3.7 million in marketable debt securities during the twelve weeks ended November 20, 2021.

During the comparable prior year period, the captive purchased $46.0 million in marketable debt securities and sold $51.2 million.

Our net cash flows used in financing activities for the thirty-six weeks ended May 8, 2021 were $2.651 billion compared to $712.2 million in the comparable prior year period.

During the thirty-six weeks ended May 8, 2021, we repaid our $250 million 2.500% Senior Notes due April 2021, which were callable at par in March 2021.

In the comparable prior year period, we received $500 million from the issuance of 3.625% Senior Notes due April 2025 and received $750 million from the issuance of 4.000% Senior Notes due April 2030.

We did not have any commercial paper activity during the thirty-six week period ended May 8, 2021 as compared to $1.030 billion in net proceeds in the comparable prior year period.

Stock repurchases were $2.478 billion in the current thirty-six week period as compared with $930.9 million in the prior year period.

Proceeds from the sale of common stock and exercises of stock options for the thirty-six weeks ended May 8, 2021 and May 9, 2020 provided $121.9 million and $56.3 million, respectively.

Our net cash flows used in financing activities for the twelve weeks ended November 20, 2021 were $895.9 million compared to $663.4 million in the comparable prior year period.

Stock repurchases were $900.0 million in the current twelve week period as compared with $678.3 million in the prior year period.

The treasury stock repurchases were primarily funded by cash flows from operations.

Proceeds from the sale of common stock and exercises of stock options for the twelve weeks ended November 20, 2021 and November 21, 2020 provided $21.1 million and $28.7 million, respectively.

During fiscal 2022, we expect to increase the investment in our business as compared to fiscal 2021.

The expected increase is driven by delays in capital spending for the third and fourth quarter of fiscal 2020 related to the uncertainties surrounding the COVID-19 pandemic.

Our investments continue to be directed primarily to new stores, supply chain infrastructure, technology and enhancements to existing stores.

The amount of our investments in our new stores is impacted by different factors, including such factors as whether the building and land are purchased (requiring higher investment) or leased (generally lower investment), located in the U.S., Mexico or Brazil, or located in urban or rural areas.

Our investments are expected to be directed primarily to expansion of our store base and supply chain to fuel the growth of our domestic and international businesses, which includes new stores, including mega hubs, as well as distribution center expansions and remodels.

The amount of investments in our new stores is impacted by different factors, including whether the building and land are purchased (requiring higher investment) or leased (generally lower investment) and whether such buildings are located in the U.S., Mexico or Brazil, or located in urban or rural areas.

In addition to the building and land costs, our new stores require working capital, predominantly for inventories.

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Extended payment terms from our vendors have allowed us to continue our high accounts payable to inventory ratio.

Accounts payable, as a percentage of gross inventory, was 123.9% at May 8, 2021, compared to 108.2% at May 9, 2020.

The increase from the comparable prior year period was primarily due to increased accounts payable purchases with favorable vendor terms and higher inventory turns.

Accounts payable, as a percentage of gross inventory, was 129.4% at November 20, 2021, compared to 114.1% at November 21, 2020.

The increase from the comparable prior year period was primarily due to increased purchases with favorable vendor terms and higher inventory turns.

Depending on the timing and magnitude of our future investments (either in the form of leased or purchased properties or acquisitions), we anticipate that we will rely primarily on internally generated funds and available borrowing capacity to support a majority of our capital expenditures, working capital requirements and stock repurchases.

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We anticipate that we will be able to obtain such financing based on our current credit ratings and favorable experiences in the debt markets in the past.

For the trailing four quarters ended May 8, 2021, our adjusted after-tax return on invested capital (“ROIC”), which is a non-GAAP measure, was 40.2% as compared to 34.0% for the comparable prior year period.

For the trailing four quarters ended November 20, 2021, our adjusted after-tax return on invested capital (“ROIC”), which is a non-GAAP measure, was 44.7% as compared to 36.0% for the comparable prior year period.

Adjusted ROIC is calculated as after-tax operating profit (excluding rent charges) divided by invested capital (which includes a factor to capitalize operating leases).

We use adjusted ROIC to evaluate whether we are effectively using our capital resources and believe it is an important indicator of our overall operating performance.

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Debt Facilities

On March 15, 2021, we repaid the $250 million 2.500% Senior Notes due April 2021 which were callable at par in March 2021.

As of May 8, 2021, the $500 million 3.700% Senior Notes due April 2022 were classified as long-term in the Consolidated Balance Sheets as we had the ability and intent to refinance them on a long-term basis through available capacity in our revolving credit facilities.

As of May 8, 2021, we had $1.998 billion of availability under our $2.0 billion Revolving Credit Agreement.

We entered into a Master Extension, New Commitment and Amendment Agreement dated as of November 18, 2017 (the “Extension Amendment”) to the Third Amended and Restated Credit Agreement dated as of November 18, 2016, as amended, modified, extended or restated from time to time (the “Revolving Credit Agreement”).

Under the Extension Amendment:

(i) our borrowing capacity under the Revolving Credit Agreement was increased from $1.6 billion to $2.0 billion;

(ii) the maximum borrowing under the Revolving Credit Agreement may, at our option, subject to lenders approval, be increased from $2.0 billion to $2.4 billion;

(iii) the termination date of the Revolving Credit Agreement was extended from November 18, 2021 until November 18, 2022;

and (iv) we have the option to make one additional written request of the lenders to extend the termination date then in effect for an additional year.

Under the Revolving Credit Agreement, we may borrow funds consisting of Eurodollar loans, base rate loans or a combination of both.

Interest accrues on Eurodollar loans at a defined Eurodollar rate, defined as LIBOR plus the applicable percentage, as defined in the Revolving Credit Agreement, depending upon our senior, unsecured, (non-credit enhanced) long-term debt ratings.

Interest accrues on base rate loans as defined in the Revolving Credit Agreement.

As of May 8, 2021, we had no outstanding borrowings and $1.7 million of outstanding letters of credit under the Revolving Credit Agreement.

On November 15, 2021, we amended and restated our existing revolving credit facility (the “Revolving Credit Agreement”) pursuant to which our borrowing capacity under the Revolving Credit Agreement was increased from $2.0 billion to $2.25 billion and the maximum borrowing under the Revolving Credit Agreement may, at our option, subject to lenders approval, be increased from $2.25 billion to $3.25 billion.

The Revolving Credit Agreement will terminate, and all amounts borrowed will be due and payable, on November 15, 2026, but we may make up to two requests to extend the termination date for an additional period of one year each.

Revolving borrowings under the Revolving Credit Agreement may be base rate loans, Eurodollar loans, or a combination of both, at our election.

The Revolving Credit Agreement includes (i) a $75 million sublimit for swingline loans, (ii) a $50 million individual issuer letter of credit sublimit and (iii) a $250 million aggregate sublimit for all letters of credit.

Under our Revolving Credit Agreement, covenants include restrictions on liens, a maximum debt to earnings ratio, a minimum fixed charge coverage ratio and a change of control provision that may require acceleration of the repayment obligations under certain circumstances.

As of November 20, 2021, we had no outstanding borrowings, $1.8 million of outstanding letters of credit and $2.2 billion of availability under our Revolving Credit Agreement.

We also maintain a letter of credit facility that allows us to request the participating bank to issue letters of credit on our behalf up to an aggregate amount of $25 million.

The letter of credit facility is in addition to the letters of credit that may be issued under the Revolving Credit Agreement.

As of May 8, 2021, we had $25.0 million in letters of credit outstanding under the letter of credit facility, which expires in June 2022.

In addition to the outstanding letters of credit issued under the committed facilities discussed above, we had $136.9 million in letters of credit outstanding as of May 8, 2021.

As of November 20, 2021, we had $25.0 million in letters of credit outstanding under the letter of credit facility, which expires in June 2022.

In addition to the outstanding letters of credit issued under the committed facilities discussed above, we had $143.8 million in letters of credit outstanding as of November 20, 2021.

These letters of credit have various maturity dates and were issued on an uncommitted basis.

On April 3, 2020, we entered into a 364-Day Credit Agreement (the “364-Day Credit Agreement”) to supplement our existing Revolving Credit Agreement.

The 364-Day Credit Agreement provided for loans in the aggregate principal amount of up to $750 million.

The 364-Day Credit Agreement had a termination date of, and any amounts borrowed under the 364-Day Credit Agreement were due and payable on, April 2, 2021.

Revolving loans under the 364-Day Credit Agreement could be base rate loans, Eurodollar loans, or a combination of both, at our election.

Effective February 22, 2021, we terminated the 364-Day Credit Agreement.

There were no borrowings outstanding under the 364-Day Credit Agreement.

We entered into the 364-Day Credit Agreement to augment our access to liquidity due to macroeconomic conditions existing at the time, and we determined the additional access to liquidity was no longer necessary.

As of November 20, 2021, the $500 million 3.700% Senior Notes due April 2022 are classified as current in the Consolidated Balance Sheets as the Company has the intent to utilize operating cash to fund the repayment.

All Senior Notes are subject to an interest rate adjustment if the debt ratings assigned are downgraded (as defined in the agreements).

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All of the repayment obligations under our borrowing arrangements may be accelerated and come due prior to the applicable scheduled payment date if covenants are breached or an event of default occurs.

As of May 8, 2021, we were in compliance with all covenants and expect to remain in compliance with all covenants under our borrowing arrangements.

Our adjusted debt to earnings before interest, taxes, depreciation, amortization, rent and share-based compensation expense (“EBITDAR”) ratio was 2.0:1 as of May 8, 2021 and was 2.6:1 as of May 9, 2020.

As of November 20, 2021, we were in compliance with all covenants and expect to remain in compliance with all covenants under our borrowing arrangements.

Our adjusted debt to earnings before interest, taxes, depreciation, amortization, rent and share-based compensation expense (“EBITDAR”) ratio was 2.0:1 as of November 20, 2021 and was 2.3:1 as of November 21, 2020.

We calculate adjusted debt as the sum of total debt, financing lease liabilities and rent times six;

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We believe this is important information for the management of our debt levels.

To the extent EBITDAR continues to grow in future years, we expect our debt levels to increase;

conversely, if EBITDAR declines, we would expect our debt levels to decrease.

Management expects the ratio of adjusted debt to EBITDAR to return to pre-pandemic levels in the future, increasing debt levels.

Once the target ratio is achieved, to the extent adjusted EBITDAR increases, we expect our debt levels to increase;

conversely, if adjusted EBITDAR decreases, we would expect our debt levels to decrease.

Refer to the “Reconciliation of Non-GAAP Financial Measures” section for further details of our calculation.

Stock Repurchases

From January 1, 1998 to May 8, 2021, we have repurchased a total of 149.7 million shares of our common stock at an aggregate cost of $24.832 billion, including 2.0 million shares of our common stock at an aggregate cost of $2.478 billion during the thirty-six week period ended May 8, 2021.

On December 15, 2020, the Board voted to increase the repurchase authorization by $1.5 billion.

On March 23, 2021, the Board voted to increase the repurchase authorization by an additional $1.5 billion.

This raised the total value of shares authorized to be repurchased to $26.15 billion.

Considering cumulative repurchases as of May 8, 2021, we had $1.318 billion remaining under the Board’s authorization to repurchase our common stock.

Subsequent to May 8, 2021 we have repurchased 119,391 shares of our common stock at an aggregate cost of $174.8 million.

From January 1, 1998 to November 20, 2021, we have repurchased a total of 150.8 million shares of our common stock at an aggregate cost of $26.6 billion, including 514,534 shares of our common stock at an aggregate cost of $900.0 million during the twelve week period ended November 20, 2021.

On October 5, 2021, the Board voted to authorize the repurchase of an additional $1.5 billion of our common stock in connection with our ongoing share repurchase program.

Since the inception of the repurchase program in 1998, the Board has authorized $27.7 billion in share repurchases.

Considering the cumulative repurchases as of November 20, 2021, we had $1.0 billion remaining under the Board’s authorization to repurchase our common stock.

Subsequent to November 20, 2021 and through December 10, 2021, we have repurchased 63,909 shares of our common stock at an aggregate cost of $120.0 million.

On December 14, 2021, the Board voted to increase the authorization by $1.5 billion to raise the cumulative share repurchase authorization to $29.2 billion.

Considering the cumulative repurchases subsequent to November 20, 2021 and through December 10, 2021 and the December 14, 2021 additional authorization, we have $2.4 billion remaining under the Board’s authorization to repurchase our common stock.

Off-Balance Sheet Arrangements

Since our fiscal year end, we have canceled, issued and modified stand-by letters of credit that are primarily renewed on an annual basis to cover deductible payments to our casualty insurance carriers.

Our total stand-by letters of credit commitment at May 8, 2021, was $163.5 million, compared with $246.9 million at August 29, 2020, and our total surety bonds commitment at May 8, 2021, was $41.9 million, compared with $56.7 million at August 29, 2020.

Our total stand-by letters of credit commitment at November 20, 2021, was $170.6 million, compared with $162.4 million at August 28, 2021, and our total surety bonds commitment at November 20, 2021, was $36.8 million, compared with $35.4 million at August 28, 2021.

Financial Commitments

Except for the previously discussed termination of the 364-Day Credit Agreement and the repayment of the $250 million 2.500% Senior Notes due April 2021, as of May 8, 2021, there were no significant changes to our contractual obligations as described in our Annual Report on Form 10-K for the year ended August 29, 2020.

Except for the previously discussed Revolving Credit Agreement, as of November 20, 2021, there were no significant changes to our contractual obligations as described in our Annual Report on Form 10-K for the year ended August 28, 2021.

Reconciliation of Non-GAAP Financial Measures

7 unchanged sentences

Adjusted After-Tax ROIC

The following tables calculate the percentages of adjusted ROIC for the trailing four quarters ended May 8, 2021 and May 9, 2020.

The following tables calculate the percentages of adjusted ROIC for the trailing four quarters ended November 20, 2021 and November 21, 2020.

Trailing Four

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Tax effect (2)

Deferred tax liabilities, net of repatriation tax

Adjusted after-tax return

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Adjusted Debt to EBITDAR

The following tables calculate the ratio of adjusted debt to EBITDAR for the trailing four quarters ended May 8, 2021 and May 9, 2020.

The following tables calculate the ratio of adjusted debt to EBITDAR for the trailing four quarters ended November 20, 2021 and November 21, 2020.

Trailing Four

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Income tax expense

Adjusted EBIT

Depreciation and amortization expense

10 unchanged sentences

Income tax expense

Adjusted EBIT

Depreciation and amortization expense

5 unchanged sentences

Adjusted debt to EBITDAR

(1) The fiscal year ended August 31, 2019 consists of 53 weeks.

All other presented fiscal years are based on 52 weeks.

(2) The table below outlines the calculation of rent expense and reconciles rent expense to total lease cost, per ASC 842, the most directly comparable GAAP financial measure, for the trailing four quarters ended May 8, 2021 and May 9, 2020 (in thousands):

Total lease cost, per ASC 842, for the trailing four quarters ended May 8, 2021

Finance lease interest and amortization

Variable operating lease components, related to insurance and common area maintenance

Rent expense for the trailing four quarters ended May 8, 2021

Total lease cost, per ASC 842, for the 36 weeks ended May 9, 2020

(1) The table below outlines the calculation of rent expense and reconciles rent expense to total lease cost, per ASC 842, the most directly comparable GAAP financial measure, for the trailing four quarters ended November 20, 2021 and November 21, 2020 (in thousands):

Trailing Four Quarters Ended

(in thousands)

November 20, 2021

November 21,2020

Total lease cost, per ASC 842, for the trailing four quarters

Finance lease interest and amortization

Variable operating lease components, related to insurance and common area maintenance

Rent expense for the 36 weeks ended May 9, 2020

Rent expense for the 17 weeks ended August 31, 2019 as previously reported prior to the adoption of ASC 842

Rent expense for the trailing four quarters ended May 9, 2020

(3) Effective tax rate over trailing four quarters ended May 8, 2021 and May 9, 2020 is 21.8% and 21.5%, respectively.

Rent expense for the trailing four quarters

(2) Effective tax rate over trailing four quarters ended November 20, 2021 and November 21, 2020 is 21.0% and 21.6%, respectively.

(3) All averages are computed based on trailing five quarter balances.

5 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis